Perfect Storm?

Money storms

The new normal

The economic world of today is so driven by central bank actions, it’s like nothing before. Not just currencies, but stocks, commodities, etc. It really could be the perfect storm.

If you look historically at futures on stocks, for instance, since late 2014, they have started to go crazy. Huge swings, which are then taken back, negated, over and over. That is not natural, not over and over. It’s not a natural “auction.”

The reason charts work technically is because auctions work a certain way. Price finds value, and balances until something changes. Then it trends, seeking the new value. It finds value again, and balances. And so on. This doesn’t just change back and forth, intraday, day after day, week after week, all because central bankers hint about moving rates by a quarter of a %. Value in stocks, for instance, “should” come from the performance of companies. Minor adjustments to interest rates “should” be irrelevant.

Imagine if you wanted to buy a car, and the price kept jumping around between $30k and $60k. Price suddenly goes way up, so you naturally think it’s going to go up some more. But then suddenly, price falls right back to where it was, which negates the up move. So you naturally think something went terribly wrong, and price is about to come down. But no, then price jumps right back up, half way up, then all the way up, then back down, and so on. That is a market that has no idea how to value that car. And this happens almost every day, during the day, and then week to week, and month to month.

And what is the basis for all this jumping around? Not demand for those cars, but rumors that financing will subtly change, or something like that. It “should” be demand for those cars, but that is not changing at the time of the price swings…not that much. Instead it is rumors of conditions that will in the future change the cost of making the cars, or undermine the economic demand for those cars, and then the dealers are pulling their hair out, and keep changing the price of the car, up and down, and down an up.

Look at the SP500 daily chart over the past couple of few years.

1. clear, compressing up trend from 2012-Oct 2014…an upward wedge like that is a bearish formation normally. It doesn’t normally accelerate up from that. But if you zoom way out, the up trends from 1970-2000 did several times accelerate out of this formation. So it became natural for that historical period. But usually, it’s bearish.

2. Oct 2014, sharp break down, but this is immediately taken back, with no follow through. This is where things start to get weird. That should be really bullish. Quick total rejection of going lower. So the up move is now the new impulse. But what does it do next?

3. We start getting these phases for a year, where every move is negated. Back and forth. Ok, so on a large time frame, this is balance, right? Roughly, the market decides the higher prices are fair. What’s that? A bull flag. But no.

4. Aug 2015 we get another sharp move down. And price does not instantly reject these lower levels, as it had in Oct 2014. It’s balance, accepting lower price. What’s that? A bear flag. But no.

5. Price moves sharply up, taking back the whole Aug 2015 down move. Then it balances back at the highs. Ok. So what’s that? A bull flag. But no.

6. price falls again, makes another bear flag, which slightly completes, making that W image, then just goes right back to the highs, making another bull flag.

So what has happened between Oct 2014 and May 2016? It is a bigger version of those little sideways back and forth moves that happened from Dec 2014-Aug 2015. That was technically a bull flag, but turned out to be a ragged top.

It is said that tops can often be complex, where as bottoms are usually sharp rejections.

Anyway, this whole 2 year time frame became a larger fractal of that smaller balance area, where move after move was negated. The whole area became a bull flag, just like that one, except that that one failed, and this one completed. But what happened when it completed?

Which brings us up to the present. In which we are in a bull flag. So will price move up, as it “should.” What is the new normal?

And more importantly, what does the new normal say about “fundamentals.”

Traders, or investors actively watching the market know, this action has been driven primarily by comments from central bankers. Not really even actions, since there is really little the ECB and Fed can do these days, or Japan, GB….and China, who knows about them?

How will this play out? My current metaphor, having just been hit by Matthew, is that it’s like watching a major cyclone approaching us. It’s huge, way bigger than us puny humans. Will it just change course, dissipate, blow over, or will it continue? It could be catastrophic. Or it could be nothing. Or somewhere in between. Very hard to predict.

But it IS a storm, make no mistake. It is a HUGE fucking storm. Bigger than anything anyone has seen in generations. Potentially a 100 year storm. People have a very hard time thinking about things like this, because they have never seen anything like it in their lifetime. And it is possibly bigger than anything anyone has seen in any life time.

But…yes, it could just blow over.

I would say all those little fractals in markets over the past 2 years are like mini central bank storms. Taken collectively, they are starting to form a pattern, something bigger.

The thing that would make it go catastrophic is if there was some economic trigger…some unpredictable economic disruption, when central banks have already done everything in their power. That’s why markets briefly freaked out on the Deutsche Bank news.

But if there is no major disruption, markets could just go on like this. Mini storm after mini storm blowing over, creating a giant balance area made up of a growing series of failed trends, representing growing confusion.